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Delaware betting big on blockchain

The Delaware General Assembly will soon consider amending the state's corporate law so companies can use blockchain technology to better track stock owners.

A Dole ship at the port of Wilmington. The use of blockchain technology could have prevented confusion created over a recent lawsuit against the company in Delaware Chancery Court.(Photo: JENNIFER CORBETT/THE NEWS JOURNA)

The Delaware General Assembly will soon consider amending the state's corporate law so companies can use blockchain technology to better track stock owners.

Supporters say the measure has two advantages. First, it will keep Delaware's $1.4 billion incorporation franchise competitive in the wake of increased threats from other states and even a few international jurisdictions. Delaware is home to more than 1 million corporate entities, including 64 percent of Fortune 500 companies. Those entities pay incorporation fees and taxes to the state, which account for nearly a quarter of Delaware's budget. If those entities incorporate somewhere else, Delaware would have to make up that revenue elsewhere, including the possibility of raising taxes.

A second benefit, state officials say, is that it will put Delaware at the forefront of the blockchain revolution, encouraging developers of the technology to build and expand their businesses in the First State. Last year, corporations and venture capitalists invested more than $1 billion in blockchain startups, a market that is expected to hit $19.9 billion by 2025, according to Research and Markets, an Irish consumer data tracker.

Companies including Paypal and Ebay have been investing in the technology. JPMorgan Chase, which has more than 10,000 employees in Delaware, recently announced an increased emphasis on blockchain as part of its $9 billion technology overhaul.

"This permits Delaware to leapfrog other states," said Marco Santori, a partner at New York-based Cooley LP, who is advising Delaware on the blockchain technology.

Blockchain technology began as part of the digital currency bitcoin. It is an automated record of a financial exchange or other transaction without a middleman. Thousands of computers work together on a shared system to record the transfer of money, signing of a document, to issuing stock. Some industry analysts have suggested that blockchain could be used to record votes in an election.

Last May, then-Gov. Jack Markell announced an ambitious state initiative to embrace blockchain. He said at that time Delaware should foster a regulatory environment that would be receptive to blockchain technology.

The proposal is part of a package that largely comprised of small changes to the DGCL, said Matt O'Toole, an attorney at Potter Anderson & Corroon, and chair of the bar association's Corporate Law Council. It is still being reviewed by the bar association and could be submitted to the Delaware General Assembly by the end of the month.

Two recent high-profile cases in the Delaware Court of Chancery highlighted the need for blockchain technology. In February, a class-action lawsuit involving Dole Foods created a headache for the court after it was revealed the company has issued 12 million more shares of stock than it initially thought. Last year, the Chancery Court barred several Dell Inc. shareholders from pursuing litigation because confusion mistakenly caused their shares to vote in favor of the transaction they were protesting.

Chancery Court Vice Chancellor J. Travis Laster, in a speech to the Council of Institutional Investors last year, openly advocated for blockchain technology. He called it "the plunger that can unclog the plumbing of capital markets for the benefit of investors."

Those two cases are not the only examples of how the court could benefit from blockchain technology. O'Toole said that every year the chancery court uses its resources, which come from taxpayer dollars, to resolve smaller disputes over the issuance of stock, typically as it relates to an Initial Public Offering. This amendment could make that a thing of the past.

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Longshoremen help unload a Dole shipment in March at the Port of Wilmington.(Photo: JENNIFER CORBETT/THE NEWS JOURNAL)

"I don't think it's going to happen overnight, but this could address some of the problems the court has wrestled with over the years," O'Toole said.

Santori said issuing stock can be a difficult process.

"It's not just complex, but you have to figure out all kinds of legal provisions," he said. "It's prone to human error and not a very good process. Blockchain changes all that."

Politicians in other parts of the country, including Nevada, Connecticut and Rhode Island, have threatened to siphon some of Delaware's incorporation dollars into their states. If another state were to take a mere 1 percent of Delaware's incorporation franchise that would be a $10 million hit to the state budget.

"We need to continue to be innovative and allow corporations incorporated in Delaware to utilize whatever technology is available to them to be more efficient," said Kris Knight, Delaware Deputy Secretary of State. "Being smarter and faster and all those things helps Delaware."